Passport outsourcing: multiple providers a good start

By David Donaldson

Tuesday March 29, 2016

The Department of Foreign Affairs and Trade’s decision to look at contracting out passport lodgement services to multiple providers is a good starting point for improving services by keeping providers on their toes, one outsourcing expert argues.

DFAT is searching for either one or multiple providers to deliver an online passport application service, which would replace the current in-person service provided by Australia Post. The existing arrangement is due to expire mid-2017. The department says it may decide to contract with one or more national providers, a mix of regional providers, or a combination of the two.

Gary Sturgess, a federal and state public service veteran and professor at the Australia and New Zealand School of Government, told The Mandarin he “would be recommending that they look at multiple providers as a starting point”, explaining that “in the interests of greater contestability, contracts should never be any larger or longer than they need to be”.

“Contestability is the credible threat of competition …”

Using multiple providers makes it easier to hand work from one doing a poor job to someone else.

“Contestability is the credible threat of competition, and that is what drives efficiency,” he said. “To hand out a single large contract for, say, 10 years, means that the threat of competition is rather weak. If a five-year contract will do — or 5+2 or 7+3 — they would have more competition points, and greater contestability.”

“Likewise, if you have multiple providers (assuming that there are not other reasons for having one large one) then, again, you have more competition points, and yes, if one fails to perform it is much easier to hand a region over to one of the other providers.”

Private companies, such as Marks & Spencer in the United Kingdom, have adopted the approach of using multiple providers nationwide. “Which meant,” Sturgess explained, “they could benchmark performance and replace a poorly performing provider more readily.

“Knowing they could easily be replaced by one of their peers meant that each provider stayed on their toes.”

Contingency from failure — but greater cost?

Melbourne School of Government professor of management Janine O’Flynn is less sanguine. As with all government outsourcing, the answer to whether it will improve services or lower costs, as she’s previously publicly argued, depends on the situation.

Using multiple providers can merely create more work for those in government overseeing the agreement, she notes.

“It may provide contingency if one provider falls over, or cannot perform,” she told The Mandarin. “It may also cost more because instead of managing a relationship with one party you have many — each with their own opportunities and challenges. These relationship costs are rarely factored into our assessment of whether or not the outsourcing is working or not.”

The federal program jobactive, which tries to get the unemployed into work via a web of providers, is one such example.

“The cost of monitoring that network of providers would be substantial …”

“The cost of monitoring that network of providers would be substantial and we are not sure whether it delivers increased value overall when we trade off the relationship costs and benefits with the service costs and benefits,” O’Flynn argued.

To really drive competition, the threat to replace failing providers must be credible, too. It won’t amount to much if government is unwilling to follow through.

“Contracting with multiple providers may — stress may — create an environment where you can use performance pressure to create ongoing competition, but only if you are willing to reallocate the work,” O’Flynn said.

It’s also important for governments to consider whether making services more contestable can create problems. As O’Flynn asked: “Are there broader security issues that may be raised by moving this process more online? Will some providers cut corners to process quicker to meet targets? Would cases of fraudulent issuing of passports pose political risks?”

In the United States, for example, the firm previously charged with carrying out government background checks has been accused of rushing through checks as the company tried to maximise the payments it received per job completed.

Poorly designed agreements such as this can mean a saving for the taxpayer — but the job ends up being done shoddily.

“As with any outsourcing decision the big questions will be whether the buyer can specify what it is they want the provider to actually do and then check whether they have done this as agreed,” O’Flynn noted. “Around that, of course, sits huge issues of contractual capacity, provider behaviour, incentives and so on.”

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